Daily Commentary

MarketMinder’s View: Eurozone officials are currently embroiled in a review of EU banking regulations surrounding capital requirements, aiming to simplify a morass they say makes their institutions less competitive globally with American, British and other banks outside their jurisdiction. One key issue under debate: How conflicting rules complicate capital requirements, to the point that even if an institution is judged to hold excess high-quality capital, it may not be able to boost dividends, lend more aggressively, etc., because that capital is also tabbed for another, conflicting capital requirement. Germany’s central bank, the Bundesbank, is pitching a controversial “fix” to this: Simplifying all capital rules into two sleeves, one for “going concerns” and one for “gone concerns”—to be used in winding down failed institutions. The issue? “The first bunch would only include capital that is easiest to absorb losses with, consisting largely of shareholders equity and retained earnings. The second bunch would include [Additional Tier 1] AT1 bonds along with other forms of subordinated debt such as Tier 2 instruments, which can have maturity dates. That has raised concerns that banks which rely on AT1 debt could face capital shortfalls to meet their so-called going concern requirements. But even countries where banks don’t use a lot of AT1 debt are pushing back, because the German proposal could end up forcing them to raise it to meet the requirements of the second pillar.” This would effectively change the definition of AT1 debt under regulatory rules, which has been a contentious point for many years in the bloc, highlighted when UBS’s acquisition of Credit Suisse in 2023 wiped AT1 bondholders before stockholders. This re-regulation is far from a done deal and may never happen. But it is worth monitoring the debate to see if an effort to boost eurozone competitiveness carries unintended consequences.

MarketMinder’s View: Bitcoin is rallying somewhat mid-morning Tuesday, but it isn’t offsetting Monday’s drop to bring the cryptocurrency down -32% from early October all-time highs. This piece pins the blame for that drop largely on the Bank of Japan, which seems to be hinting at a potential short-term policy rate hike soon. That, the piece argues, threatens traders who borrowed cheaply in Japan and plowed the money into bitcoin … and US stocks. It argues bitcoin’s November drop—which temporarily coincided with stocks—foreshadows broader trouble for US stocks. But any look at bitcoin’s history shows it isn’t some kind of “risk asset harbinger” or canary in the coal mine for equity market trouble ahead. Bitcoin is a speculation, pure and simple, in which people try to game one another’s feelings. It has no fundamentals like earnings, sales or dividends—no adaptability and no link to human creativity. Is the Bank of Japan’s potential tightening to blame for its weakness? Maybe, but we doubt it. For one, the carry trade is usually used in bond trading, given it is about borrowing cheaply and earning a higher yield elsewhere—so bond yield gaps matter most, especially because crypto has no yield (despite the conflation of that term with return in this piece). And, when you consider a rate hike in Japan would be from 0.5% currently, the policy gap rate would still be fairly significant post-hike, as America’s fed-funds target range is presently 3.75% - 4.00%. Even on longer-term bonds, the gap is wide: 10-year Japanese government bonds yield 1.86% while US are just over 4.00%. (All figures from FactSet.) This seems like searching for meaning in bouncy bitcoin, then twisting that quest into a tortured narrative to stocks. 

MarketMinder’s View: “Euro zone inflation stood at 2.2% in November, marking a slight rise from the previous month, flash data from data agency Eurostat showed Tuesday. The latest consumer price index reading is just a shade above the European Central Bank's 2% target. … Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, was at 2.4% in November, unchanged from the previous month.” It is the slightest of rises, actually, with the year-on-year rate rising 0.1 percentage point while monthly prices fell, suggesting the titular rise is even more hollow than the tiny uptick itself suggests. While these figures are preliminary and offer little detail, there is nothing here that suggests inflation is a problem in Europe today. These rates more or less match the ECB’s 2% y/y target, and there are no tools to fine tune inflation to the decimal point. The speculation in the back part of this surrounding future policy and whether cuts are off the table is needless. Inflation is the last war in Europe, cuts are largely a fait accompli and there is little sign further tweaks are needed for growth and bull market to persist.